Great pedigree, but is Argo’s new fund a winner?

SHOULD you buy into Argo’s new listed infrastructure investment fund? The Barefoot Investor delivers his verdict.

Bono and The Edge in their “AGLI” era. Picture: JONATHAN HAYWARD/AP

“HAVE you ever thought what would happen if AFIC or Argo went tits up?” asked my old man, blunt as a battle-axe. “That will never, ever happen”, I assured him.

Still, I took his point. Over the past 15 years, I’ve been responsible for putting thousands of investors — including my old man — into either the Australian Foundation Investment Company (AFIC) or Argo Investments.

And this explains why my email went into meltdown last month when Argo announced it was launching a new offering called Argo Global Listed Infrastructure Limited (AGLI), in which existing Argo shareholders will be offered a “priority allocation”.

So, should you take up shares in AGLI before the offer closes on June 19?

Well, I’ll give you my recommendation (and have a quick chat to Argo’s managing director as well).

But before I do, let’s talk about Don Bradman, the end of World War II, and a small group of mum-and-dad investors who outsmarted the flashy fund managers and compounded their families’ wealth for nigh on 80 years.

The best companies stand for something.

Since 1946, Argo has stood for low-cost, long-term investing.

After the end of World War II, Adelaide accountant Alf Adamson created Argo Investments to serve small investors — retirees, mums and dads, war widows. Argo invested conservatively, delivered a growing stream of dividends, and always put its shareholders first.

Argo’s core “business” was buying shares in other companies. This type of company is known as a listed investment company (LIC).

It was, in effect, an early version of what we now call a managed fund, but with one very important difference: rock-bottom fees. And when you mix ultra-low costs with conservative long-term investing, you get a compounding machine. And that’s exactly what Argo has been since 1946. (Even in the 1980s, when financial advisers were embracing big fees, big hair and big phones, Argo’s managers continued quietly going about their business, and putting their shareholders first.)

After he pulled up stumps in the late forties, Sir Donald Bradman presumably had his pick of corporate boards, yet he chose to become the chairman of Argo. The Don ran Argo the same way he played his cricket: safe and steady.

 

THE THREE GOLDEN RULES FOR MANAGING MY MONEY

ONE of the most important lessons I’ve learned in my years as an investor is that whoever you trust to manage your money must meet three criteria:

1. Absolute integrity;

2. A track record of success, preferably measured in decades;

3. A conservative, long-term approach, with an aversion to debt.

Argo (along with AFIC, and Warren Buffett’s Berkshire Hathaway) meets these three criteria, which is why it’s been an outstanding long-term investment — and why I’ve invested in it.

 

THE NEW KID ON THE BLOCK

SO, on pure pedigree, Argo’s new offering, AGLI, has to be worth a look, right?

After all, Argo has had only three managing directors in 70 years: Alf Adamson, Rob Patterson (who’s still a director) and now Jason Beddow. So surely Beddow wouldn’t go all Krusty the Clown on us and slap Argo’s name on anything, just for a few bucks?

Let’s dig in, starting with the facts.

ALGI plans to raise between $200 million and $600 million. The money will be invested in 50 to 100 international infrastructure stocks: pipelines, airports, roads and telcos.

Argo will outsource the stock picking for AGLI to a mob called Cohen & Steers and will, for its efforts, trouser a tidy 50 per cent of the fees and snap up 12.5 per cent of the shares.

Now let’s dig deeper, asking the questions you really want the answers to. Is AGLI ultra-low cost like Argo? No.

AGLI is charging about eight times more than Argo does — a total of 1.2 per cent per annum, plus costs (though these will come down slightly as the portfolio grows).

Does AGLI have a disciplined, long-term, buy-and-hold approach like Argo? No.

According to the prospectus, its managers expect to churn half the portfolio a year.

OK, so is AGLI at least a good dividend payer? No.

Its forecast yield is a fairly depressing 3 per cent a year.

So I’ll freely admit that, when I spoke to Jason Beddow this week, I was preparing to tear his “argos” off. But when I confronted him, I was pleasantly surprised.

 

WE’RE ONE, BUT NOT THE SAME

BEDDOW: “You’re looking at it the wrong way. Argo is getting half the management fee. Think of it as a new, long-term income stream for Argo.”

Barefoot: “Go on.”

Beddow: “Nothing changes with Argo. In fact, we could actually have a zero management fee at Argo.”

Barefoot: “As an Argo shareholder that’s a very attractive proposition ... Yet this is no Argo, right?”

Beddow: “There is only one Argo, and frankly it’s unfair to compare the two.”

Maybe … but I’m willing to give it a shot. Let me put it this way.

Argo is the investment equivalent of U2. Well, the eighties version anyway. The Joshua Tree album to be exact. Before Bono started wearing sunglasses — and acting like a pretentious twat. Just good, honest rock.

AGLI is like U2’s latest album, Songs of Innocence. The songs sound vaguely familiar. But it has no soul. Seriously, Apple gave away the album as a “treat” to all iTunes users, without telling them how they could delete it. Cue Twitter meltdown.

Barefoot: “So who should invest in AGLI?”

Beddow: “If you’re living off your income, this is not the investment for you.”

Barefoot: “So who’s it for?”

Beddow: “Well, wealth accumulators. People who want overseas exposure. Remember, Australia is just 2 per cent of the global market.”

Barefoot: “That’s me. That’s you.” (I’m in my thirties, Beddow in his forties.) “So are you buying some?”

Beddow: “I don’t know if I would … but I might.”

(To be fair, he later said that all Argo directors would be buying some.)

So, the Barefoot bottom line?

I’m keeping my Argo shares and hoping that the injection of cash from AGLI will reduce the already ultra-low cost of running the company. An even cheaper Argo sounds like a bargain to me.

But ... I’m passing on AGLI. If I want overseas exposure to quality infrastructure shares, I’ve got a bloke in Omaha who buys up railroads and power companies on my behalf. And, like Don Bradman, he’s got some serious runs on the board.

Achtung, Baby!

Tread Your Own Path!

Originally published as Great pedigree, but is Argo’s new fund a winner?